Income Tax Department highlights risks in crypto assets, echoing the RBI's stance on VDAs 2026

The Income Tax Department has drawn attention to serious concerns linked to virtual digital assets, including cryptocurrencies, reinforcing the caution earlier expressed by the Reserve Bank of India. The department pointed to issues such as user anonymity, cross-border fund movements, and the difficulty of tracing income streams and ultimate beneficiaries when transactions occur through overseas exchanges and private digital wallets. These issues mirror the RBI’s wider reservations regarding VDAs, particularly the lack of any underlying tangible asset and the heightened risk of their use in unlawful activities.

Income Tax Authorities Highlight Serious Cryptocurrency Threats

India’s Income Tax Department has officially identified considerable risks inherent in virtual digital assets, encompassing cryptocurrencies and related instruments. Through this stance, tax authorities have aligned themselves with the Reserve Bank of India’s long-standing warnings against the proliferation of such assets. In a presentation made before the parliamentary standing committee on finance, the department elaborated on how VDAs enable anonymous, borderless, and almost instantaneous transfers of value, often operating outside the supervision of regulated financial institutions.

Difficulties in Monitoring and Tax Compliance

Foreign-based exchanges, privately held wallets, and decentralized platforms pose major challenges for tax enforcement agencies. Determining taxable income and establishing the identity of beneficial owners becomes extremely complex, resulting in a lack of transparency around asset ownership. Jurisdictional constraints further complicate matters, as transactions may span multiple countries, significantly restricting authorities’ capacity to trace fund movements, carry out accurate tax assessments, and recover outstanding tax liabilities. Attempts to improve information exchange across borders have, to date, delivered limited results.

Wider Regulatory and Enforcement Issues

India has, by and large, refrained from allowing the widespread use of cryptocurrencies and stablecoins, despite sustained lobbying efforts from industry participants. The RBI has consistently emphasized that the absence of underlying assets makes such instruments intrinsically risky for investors. Law enforcement and investigative agencies have also voiced concerns, warning that VDAs could be misused for activities such as money laundering and financing of terrorism. The decentralized structure of these systems, combined with their frequent operation from foreign jurisdictions, makes enforcement measures—such as issuing summons or collecting Tax Deducted at Source (TDS)—especially difficult.

Protective Measures and Transaction Tracking

To enhance oversight, Indian tax authorities have begun introducing protective mechanisms, including compulsory TDS provisions, aimed at improving the tracking of beneficiaries involved in VDA transactions. Entities engaged in dealing with cryptocurrencies and other virtual digital assets are now required to register with authorities. While these initiatives are intended to improve transparency and accountability within the rapidly expanding VDA ecosystem, substantial challenges in enforcement and monitoring continue to persist.

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